Tuesday, January 30, 2007

Falling over backwards-- An essay against Reservations and against Judicial populismBy ArunShourie (2006)

ArunShourie presents an insightful view into the reservation debate from the most important point: Lawmaking and Judiciary. Today the reservation debate has informed common people on the positive and negative aspects of reservation. However, the major decision making does not involve common people and rests with the Legislatures and the Judiciary. Because of this distribution of power, knowing about how legislature and judiciary have answered the reservation debate in last 60 years of our independence is increasingly important.

After independence, the framers of our constitution decided that the principle of divide and rule played by the Britishers have caused the partition of India and Pakistan. They believed that Government should play an active role in removing all forms of discrimination. To achieve this goal, they incorporated a number of provisions in the constitution as the inviolable fundamental rights. Shourie provides a detailed view on the fundamental rights against discrimination as in Article 14: right to equality, Article 16(1): right to equal opportunity in government employment, Article 16(2): " No citizen shall, on grounds only of religion, race, caste, sex, descent, place of birth, residence or any of them, be ineligible for, or discriminated against in respect of any employment or office under the state. For

Then Shourie provides detailed analysis of how Supreme Court interpreted Constitution in striking down different laws and some Judges accepting them by a liberal interpretation of the provision and making room for reservation. Whenever the court struck down any law, the legislatures were quick and alert to immediately change the constitution with unanimous voice and complete absence of debate on the floor. Specifically:The first amendment in 1951 was actually carefully argued by Nehru and even B.R. Ambedkar on the pros and cons of this provision.

Article 15 (4) Nothing in this article or in clause (2) of Article 29 shallprevent the State from making any special provision for theadvancement of any socially and educationally backward classes ofcitizens or for the Scheduled Castes and the Scheduled Tribes.

When Supreme court ruled that quotas in promotion means differentiating between equal class of people Constitution was quickly amended to:

Article 16 (4A) Nothing in this article shall prevent the State from making any provision for reservation in matters of promotion, with consequential seniority, to any class or classes of posts in the services under the State in favour of the Scheduled Castes and the Scheduled Tribes which, in the opinion of the State, are not adequately represented in the services under the State.

When Supreme court ruled that not more than 50% of the seats can be reserved in any year, the Constitution was amended to carry over unfilled reserved vacancies to other years:

(4B) Nothing in this article shall prevent the State from considering any unfilled vacancies of a year which are reserved for being filled up in that year in accordance with any provision for reservation made under clause (4) or clause (4A) as a separate class of vacancies to be filled up in any succeeding year or years and such class of vacancies shall not be considered together with the vacancies of the year in which they are being filled up for determining the ceiling of fifty per cent. reservation on total number of vacancies of that year.

Supreme Court ruled in August 2005 that Government cannot prescribe its reservation policy to unaided institution. The Article 15 in the Constitution was amended in Dec 2005 to reverse that:

5) Nothing in this article or in sub-clause (g) of clause (1) of article 19 shall prevent the State from making any special provision, by law, for the advancement of any socially and educationally backward classes of citizens or for the Scheduled Castes or the Scheduled Tribes in so far as such special provisions relate to their admission to educational institutions including private educational institutions, whether aided or unaided by the State, other than the minority educational institutions referred to in clause (1) of article 30.".

Shourie presents a detailed analysis of Supreme Court Judges in their warnings to the Government and some Supreme Court Judges who thought specific implementation of social justice was important even if it meant breaching fundamental rights.

2. How discrimination based on caste started when our constitution does not allow it? How identification of backward classes was reduced to castes and how Supreme court accepted this argument even with a fractured verdict in the Mandal Case?

3. How legislatures have pushed India to have reservation in just everything from Government Jobs, educational institutions (aided or unaided) to even threatening to the private sector? How we have moved from 50% reservation in city colleges to highest institutions in the country?

4. Is there a way of providing social justice without abrogating fundamental rights on such a large scale?

Stiglitz presents the composition and structure of International Monetary Fund (IMF) , the way in which IMF handled the financial crises in East Asia in 1997-98, the policies IMF adopted and enforced during liberalization of Russia. Finally he discusses the possible reasons why IMF failed, its consequences on different countries and what can be done to avoid future crises.

IMF was established to avoid financial crises caused by government irresponsible spending (bad fiscal policy), fast capital erosion of stock markets, and to tackle hyper-inflation. They have handled financial crises (hyper-inflation and fiscal irresponsiblity) in latin american countries by forcing these governments to adopt contractionary policies i.e., by cutting government spending, raising interest rates and more liberalization of their capital markets.

Stiglitz finds that same policies were doggedly enforced by IMF on the East Asian countries, the African countries and during liberalization of Russian economy. The East Asian crises happened because the hot money (foreign investors) pumped into these markets and banks were issued for real estate development and these loans turned bad. As a result, money quickly moved out from these markets causing these governments to insolvency. IMF came to the rescue and proposed Interest rate hiking to 20-25% as conditions for government bailout. The firms dependent on bank loans quickly ran out of business, the economy suffered serious setbacks and went in to deep recession.

Stiglitz presents how IMF forced African countries to cut back government spending on education, which hits these countries hard in generation of human capital. The book has a special chapter on how IMF handled the Russian transformation economy from a state owned economy to a market economy. IMF adviced Russia to quickly sell off the state enterprises to private players without any regulatory institution to monitor the sell offs. As a result they were sold at dirt prices to Yeltsin family friends and other oligarchs of the russian politics. These people had few incentives in the development of these firms and more in stripping assets. As a result they stripped assets of the newly bought firms and moved their money quickly out of Russia. IMF advice was to go for even faster liberalization rather than to concentrate on the sequencing of liberalization. IMF provided more and more money to Russia for its solvency and the oligarchs kept moving out the money.

Stiglitz argues that capital markets function well only with a good regulatory agency. Therefore sequencing of liberalization is important. Secondly, he argues that while contractionary policies were right for fiscal irresponsible latin american countries they proved deadly for east asian countries. It is surprising to find that Clinton and other american governments continue with their expansionary policies (tax cuts, lower interest rates, high government spending) and do not take advice of IMF or treasury.

The results of IMF policies destroyed economy of all these countries. The countries suffered serious setback in growth and employment and many firms were shut down or stripped of their assets.

Till now I believe I was faithful in expressing Stiglitz opinions. Off course he brings up lot of interesting questions for analysis:

1. Is letting governments continue expansionary policies during the time of crises a good macro-economic policies? Isn't reigning inflation important and how do we even know that Stiglitz policies would have succeeded?

Stiglitz argues that South Korea and China which did not adopt sharp contractionary policies prescribed by IMF and had smaller recession than countries like Thailand and Indonesia. Secondly, he argues that even if evaluation of macro economic policies is hard the IMF has dictated its policies to these countries without any responsibility, without any arguments and with no willingness to listen to these countries. It is interesting to note that IMF is not a democratic institution and only US has veto power in it.

2. Shouldn't IMF have rights to dictate its policies in loaning to a "default" government?

Stiglitz argues that IMF has got back all its loaned money and no government has ever deafulted on IMF loans. So IMF loans are not risky and always paid back by taxpayers. Actually he argues IMF money has been used for bail out of foreign investors. They have ensured this by arguing that banks should maintain solvency and by pumping in money and letting investors take out money.

3. If IMF is composed of best PhD economists, they know better of macro-economic policies. Why shouldn't IMF be allowed to enforce its policies?

Stiglitz argues that many economic theories do not incorporate crises and insolvency the exact things that IMF handles. The policies have to be well sequenced by analyzing the ground conditions and by more arguments across the board. Even IMF people are recruited and move into Wall Street firms without any regulations. This creates lot of incentives for these folks to obilige Wall Street firms.